States Not Budgeting for $2 Billion DSH Cut

Rich Daly, HFMA senior writer/editor

Oct. 19—Nearly two-thirds of 2018 state budgets have not accounted for recently started cuts in federal hospital assistance, according to a new survey.

On Oct. 1, the federal government began implementing a $2 billion cut to Medicaid disproportionate share (DSH) payments for FY18. The long-delayed cuts were originally scheduled to go into effect in FY14.

“States indicated that they could face budget challenges as reductions to [DSH] payments go into effect in October 2017,” wrote the authors of the
annual survey of state Medicaid directors, conducted by the Kaiser Family Foundation and Health Management Associates.

As for states that are budgeting for the DSH cuts, Robin Rudowitz, an associate director for the Kaiser Program on Medicaid and the Uninsured, said it was unclear what steps they are taking.

“There could be some discussions as the cuts ramp up,” Rudowitz said. The cuts are scheduled to increase to $8 billion in FY25.

Although DSH cuts were included in the Affordable Care Act (ACA) as a way to fund coverage expansions, a
report by the Medicaid and CHIP Payment and Access Commission concluded the projected cuts for FY18 were larger than the decline in hospital uncompensated care between 2013 and 2014 in 20 states.

Of the $19.6 billion in total FY16 DSH payments, the federal government funded $10.6 billion and the states funded $8 billion, according to
a report from the Office of the Actuary for the Centers for Medicare and Medicaid Services. The $2 billion cut comes from the federal share.

The shares of the DSH cuts in each state were spelled out in a July 2017
proposed rule.

Legislative language to appropriate the FY18 federal DSH funding has been included in a measure to reauthorize the Children’s Health Insurance Program (CHIP), but the outlook for that legislation is uncertain because of conflicts over spending offsets to pay for it. The House and Senate versions
of the legislation differ, with the House
legislation delaying Medicaid DSH cuts for FY18 but adding two years of cuts in 2026 and 2027.

The House bill’s approach has raised concerns from some hospital advocates.

“While we appreciate the one-year delay in the House Committee on Energy and Commerce bill to extend CHIP, we continue to advocate a two-year delay and smaller out-year cuts to provide greater stability for hospitals and more time to find a long-term fix,” said Bruce Siegel, MD,
president and CEO of America’s Essential Hospitals. “Staying on a path of one-year delays only will dig the fiscal hole deeper and make finding solutions more difficult.”

Flat Rates

Beyond cuts to Medicaid DSH payments, hospitals also are facing stagnant or declining inpatient Medicaid payment rates in FY18, according to the survey.

In FY18, 39 states will freeze inpatient rates and five states will cut them. In FY17, four states cut rates.

Meanwhile, 17 states will increase the rates in FY18—the same number as in FY17.

The general stagnation in inpatient rates runs somewhat contrary to historic Medicaid trends, with programs usually increasing payment during economic upswings.

“Typically, we’ve always seen more provider rate increases during economic recoveries and less decreases, but I can’t fully answer the question of why we are not seeing more increases on the hospital side,” Rudowitz said.

The flat FY18 rates also followed the finding of an American Hospital Association
report that Medicaid payments to hospitals covered only 90 cents of every dollar spent on caring for those patients in 2015.

Generally, states were less likely to cut and more likely to increase payments for other categories of providers for FY18. For instance, 16 states increased outpatient hospital rates, 28 states increased skilled nursing facility rates, 29 states increased pay for home- and community-based services,
and 12 states increased rates for primary care physicians.

Hospitals were the fourth-highest recipient of Medicaid spending, according to the Actuary, consuming 17.9 percent—less than home health, nursing homes, and “other care.”

The stalled inpatient rates come as states face new fiscal pressures over Medicaid, which covered 74 million beneficiaries as of June 2017. States covered only 37 percent of Medicaid’s $553 billion cost in FY16, but state spending increased by 3.5 percent in FY17 and accelerated to a 6
percent increase for FY18.

The increased state spending was driven by several factors, including an increase from 5 percent to 6 percent in their share of the cost of covering enrollees who became newly eligible under the ACA. In the 31 states that expanded eligibility, the state share of new enrollees’ costs will
increase to 10 percent by CY20. Another financial headwind was slow growth in state tax revenue in 2016 and into 2017.

In addition to provider rate increases, higher Medicaid costs for states for FY18 were driven by faster growth in the aged and disabled enrollment groups. Those groups account for a larger share of program spending, including on high-cost prescription drugs, according to the survey authors.

Such state budget pressures were anticipated in an August
report from Moody’s Investors Service.

Another Medicaid trend that could financially impact hospitals is the movement toward greater patient cost sharing, which hospitals frequently cover.

Maine, New Mexico, and Utah reported instituting new or increased copayments for non-emergency use of hospital emergency departments, which were part of pending Section 1115 waiver requests in the cases of Maine and Utah. Colorado increased copayments for hospital outpatient services.

Provider Taxes

States were increasingly reliant on provider taxes and fees to fund their share of Medicaid costs, according to the survey.

The number of states with at least one provider tax increased from 21 in FY03 to all but one state by FY13. By FY17, 34 states had three or more provider taxes, with nursing home taxes being most common (44 states), followed by taxes on hospitals (42 states) and on intermediate care facilities for
the intellectually disabled (36 states). In FY18, three states planned to add new provider taxes and 13 planned to increase at least one provider tax. Only five states planned to decrease provider taxes.

Federal law limits such taxes to 6 percent of net patient revenues, and the survey found that 29 states had at least one provider tax exceeding 5.5 percent. The increasing reliance on such taxes is relevant because federal legislation that was narrowly rejected by the Senate would have reduced
the limit on provider taxes to 4 percent of net patient revenues by FY25.

Oct. 19—Nearly two-thirds of 2018 state budgets have not accounted for recently started cuts in federal hospital assistance, according to a new survey.

On Oct. 1, the federal government began implementing a $2 billion cut to Medicaid disproportionate share (DSH) payments for FY18. The long-delayed cuts were originally scheduled to go into effect in FY14.

“States indicated that they could face budget challenges as reductions to [DSH] payments go into effect in October 2017,” wrote the authors of the
annual survey of state Medicaid directors, conducted by the Kaiser Family Foundation and Health Management Associates.

As for states that are budgeting for the DSH cuts, Robin Rudowitz, an associate director for the Kaiser Program on Medicaid and the Uninsured, said it was unclear what steps they are taking.

“There could be some discussions as the cuts ramp up,” Rudowitz said. The cuts are scheduled to increase to $8 billion in FY25.

Although DSH cuts were included in the Affordable Care Act (ACA) as a way to fund coverage expansions, a
report by the Medicaid and CHIP Payment and Access Commission concluded the projected cuts for FY18 were larger than the decline in hospital uncompensated care between 2013 and 2014 in 20 states.

Of the $19.6 billion in total FY16 DSH payments, the federal government funded $10.6 billion and the states funded $8 billion, according to
a report from the Office of the Actuary for the Centers for Medicare and Medicaid Services. The $2 billion cut comes from the federal share.

The shares of the DSH cuts in each state were spelled out in a July 2017
proposed rule.

Legislative language to appropriate the FY18 federal DSH funding has been included in a measure to reauthorize the Children’s Health Insurance Program (CHIP), but the outlook for that legislation is uncertain because of conflicts over spending offsets to pay for it. The House and Senate versions
of the legislation differ, with the House
legislation delaying Medicaid DSH cuts for FY18 but adding two years of cuts in 2026 and 2027.

The House bill’s approach has raised concerns from some hospital advocates.

“While we appreciate the one-year delay in the House Committee on Energy and Commerce bill to extend CHIP, we continue to advocate a two-year delay and smaller out-year cuts to provide greater stability for hospitals and more time to find a long-term fix,” said Bruce Siegel, MD,
president and CEO of America’s Essential Hospitals. “Staying on a path of one-year delays only will dig the fiscal hole deeper and make finding solutions more difficult.”

Flat Rates

Beyond cuts to Medicaid DSH payments, hospitals also are facing stagnant or declining inpatient Medicaid payment rates in FY18, according to the survey.

In FY18, 39 states will freeze inpatient rates and five states will cut them. In FY17, four states cut rates.

Meanwhile, 17 states will increase the rates in FY18—the same number as in FY17.

The general stagnation in inpatient rates runs somewhat contrary to historic Medicaid trends, with programs usually increasing payment during economic upswings.

“Typically, we’ve always seen more provider rate increases during economic recoveries and less decreases, but I can’t fully answer the question of why we are not seeing more increases on the hospital side,” Rudowitz said.

The flat FY18 rates also followed the finding of an American Hospital Association
report that Medicaid payments to hospitals covered only 90 cents of every dollar spent on caring for those patients in 2015.

Generally, states were less likely to cut and more likely to increase payments for other categories of providers for FY18. For instance, 16 states increased outpatient hospital rates, 28 states increased skilled nursing facility rates, 29 states increased pay for home- and community-based services,
and 12 states increased rates for primary care physicians.

Hospitals were the fourth-highest recipient of Medicaid spending, according to the Actuary, consuming 17.9 percent—less than home health, nursing homes, and “other care.”

The stalled inpatient rates come as states face new fiscal pressures over Medicaid, which covered 74 million beneficiaries as of June 2017. States covered only 37 percent of Medicaid’s $553 billion cost in FY16, but state spending increased by 3.5 percent in FY17 and accelerated to a 6
percent increase for FY18.

The increased state spending was driven by several factors, including an increase from 5 percent to 6 percent in their share of the cost of covering enrollees who became newly eligible under the ACA. In the 31 states that expanded eligibility, the state share of new enrollees’ costs will
increase to 10 percent by CY20. Another financial headwind was slow growth in state tax revenue in 2016 and into 2017.

In addition to provider rate increases, higher Medicaid costs for states for FY18 were driven by faster growth in the aged and disabled enrollment groups. Those groups account for a larger share of program spending, including on high-cost prescription drugs, according to the survey authors.

Such state budget pressures were anticipated in an August
report from Moody’s Investors Service.

Another Medicaid trend that could financially impact hospitals is the movement toward greater patient cost sharing, which hospitals frequently cover.

Maine, New Mexico, and Utah reported instituting new or increased copayments for non-emergency use of hospital emergency departments, which were part of pending Section 1115 waiver requests in the cases of Maine and Utah. Colorado increased copayments for hospital outpatient services.

Provider Taxes

States were increasingly reliant on provider taxes and fees to fund their share of Medicaid costs, according to the survey.

The number of states with at least one provider tax increased from 21 in FY03 to all but one state by FY13. By FY17, 34 states had three or more provider taxes, with nursing home taxes being most common (44 states), followed by taxes on hospitals (42 states) and on intermediate care facilities for
the intellectually disabled (36 states). In FY18, three states planned to add new provider taxes and 13 planned to increase at least one provider tax. Only five states planned to decrease provider taxes.

Federal law limits such taxes to 6 percent of net patient revenues, and the survey found that 29 states had at least one provider tax exceeding 5.5 percent. The increasing reliance on such taxes is relevant because federal legislation that was narrowly rejected by the Senate would have reduced
the limit on provider taxes to 4 percent of net patient revenues by FY25.

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